Friday, September 04, 2009

Soon You're Talking Real Money...

I finally got round to picking through this extremely interesting, timely, lucid, and well-reported Q&A at Nets Daily post about a potential sale of the New Jersey Nets basketball team. It's awesome. Go read it. Go read it again. Go pick through it yourself like an episode of The Wire. There at the bottom is a comment from me. I'm going to elucidate here on what I wrote there.

The blog's pseudonymous author has worked out that there are a lot of rather angry investors in the Nets ready to vent at the nearest knowledgeable Nets fan, and the author has done a very good job of tracking them down. They also have appeared to have gleaned a pretty convincing idea of the Nets team finances.

But buried down in the information is something pretty momentous - Ratner needs to scare up another $200 million from somewhere to finish his new stadium in Brooklyn.

According to one insider, half the $400 million [sales proceeds] would go towards the down payment on the Barclays Center and half towards reducing team debt.

I'd been working on the assumption that the $150 million that he'd sunk into the project - on land acquisitions, fees and site work, would be considered an in-kind equity contribution, its "down payment", as the Nets Daily writer put it.

Looking back at that assumption now I should have realised that FCR, which has mortgaged a lot of the footprint property to Grammercy Capital, would probably have to pay back that financing before the site could be considered equity, since I can't imagine that Grammercy would find it very entertaining to try and foreclose on land that's got a massive arena on top of it.

But there might be more to this. I've always thought that at some point the ratings agencies, no matter how supine they can be when confronted by the considerable charms of the Goldman Sachs sports financing team, might start to bite back. This is a tremendously over-leveraged developer trying to pitch a tremendously over-leveraged project to the market.

My assumption was, without knowing much about the conventions of sports team financing, that the Nets would throw whatever revenues they had at their disposal into the mix until the arena looked like it could cover its debt comfortably. TV, advertising, sponsorship, concessions, and so on. Which they may have done.

No matter. Credit markets have thawed a little, and it looks increasingly likely that the Nets - if they get the right financing structure in place - could get the bonds done at an interest rate of no more than about 2 percentage points higher than the other New York team stadiums did. But they won't be able to put in a token equity contribution.

What the agencies might be saying is that the project is so speculative, or the economic environment is so poor, that the developer is going to have to kick in some more cash to absorb revenue shortfalls before bondholders do. When the Jets and Giants are struggling to shift some seats at their new stadium this is an understandable position to take. So Ratner needs to sell the team to get this equity contribution, suggesting that additional stock or bond issues by FCE to fund this commitment are not feasible.

Now go back to the Nets Daily article and take a gander at the logistics of this. Ratner wants to sell the team, and use the proceeds to fund the stadium. But buyers - with the NBA's support, apparently - do not want to be locked into an above-market lease for a Brooklyn arena. They want to own the arena, but probably don't have the resources to convince the agencies to follow through.

The Nets losses then, are only part of the reason Ratner needs to sell. But Ratner might not be able to sell the team until the financing is in place, but needs to sell the team to conclude the financing. Can he bundle both into a single instantaneous transaction? Watch this space.